PDF China'S E-commerce: the New Branding Game

CHINA'S E-COMMERCE: THE NEW BRANDING GAME

In growing numbers, Chinese shoppers migrate their online purchases from cheap, generic goods to brands. This is redefining the whole e-commerce landscape.

Copyright ? 2015 Bain & Company, Inc. All rights reserved.

China's E-Commerce: The New Branding Game

Table of contents

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 1 1. Overview of China's e-commerce market . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 5 2. Call it the "branded" Internet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 9 3. Becoming an "Internet-enabled" brand . . . . . . . . . . . . . . . . . . . . . . . . pg. 13

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China's E-Commerce: The New Branding Game

Executive summary

Every single day of every week, an estimated 150,000 new Chinese shoppers join the ranks of the hundreds of millions in the country who have discovered the world of e-commerce. Online retail penetration in China reached 11% in 2014 and surpassed RMB 2.9 trillion in total value. Penetration is expected to double by 2020, according to our estimates, with the total value skyrocketing to RMB 10 trillion. But this dramatic adoption of online shopping is not the biggest news to emerge from Bain & Company's latest research on China's e-commerce market. The exciting finding is the way that e-commerce is now shaping consumer behavior and the profound influence those shoppers are having on online sellers. Despite the massive and steady growth in penetration and value, China e-commerce is rapidly evolving to become more than a numbers game for both consumers and sellers.

In the earliest days of e-commerce, the major reason consumers went online was for lower prices on generic goods than they could find in physical stores. Now, in record numbers, they're swiftly growing in taste and sophistication, turning to online commerce for quality products and brand names and looking for a satisfying shopping experience. In response, sellers have made a similar shift from the quantitative to the qualitative. Sure, it's still important for them to grow the number of shoppers, but it's no longer an aggressive and single-minded land grab. Now it's critical for them to develop the best brand strategies and investments to serve an increasingly savvy market, seeking valuable customer insights that can help them hone their branded offerings and improve everything from marketing to supply chains.

To help us understand how brands are adapting and transforming their strategies amid these changes in the world's largest digital marketplace, we partnered with AliResearch, Alibaba Group's research arm. We focused much of our research on six major trends in the e-commerce market that we expect to intensify in the next few years:

? The market is becoming increasingly structured. The changes in today's e-commerce market are not dissimilar to those that occurred when shoppers made the leap from wet markets to shopping malls. E-commerce started out as a vast C2C marketplace but has steadily given way to sophisticated B2C players. Today, B2C accounts for half of all online sales, a portion that is expected to grow to 70% by 2020, with B2C heavily concentrated among a handful of players.

? Online shopping is becoming better integrated into daily life. The year 2015 will be remembered as the one in which mobile e-commerce outgrew PC sales for the first time, as Chinese consumers took advantage of their ability to buy online--anytime and anyplace--via mobile phones. Chinese consumers now make 55% of their online purchases from their mobile phones, and that figure is expected to grow to 70% by 2020.

? The era of branded1 Internet goods is upon us. Chinese consumers are trading up, and the Internet is playing a key role by providing easier, less expensive and more efficient access to brands. The share of online branded products increased by 7 percentage points in the past three years to 65%, accounting for RMB 1 trillion in sales. This translates into approximately RMB 750 per capita for branded goods bought online, or 4% of China's retail market size.

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China's E-Commerce: The New Branding Game

? Contributing to this boom in branded online sales, smaller brands find themselves unrestricted by the many barriers to entry and route-to-market obstacles they often encounter in the offline world. As a result, they're growing quickly online, leveraging lower-cost channels such as product reviews for communication and branding. In the old world, only the biggest brands had the scale that enabled access to distribution, marketing and the other capabilities required to win in the offline world. As such, they had a significant advantage over smaller brands. What's now changed is that smaller brands are on equal footing. They can reach and serve consumers--the same consumers targeted by top brands--anywhere, instantly and directly, by making the most of such newly available capabilities as digital advertising. This development has served as a wake-up call for bigger brands, who are watching advances in sales and influence among smaller brands. The figures are impressive. Regional and pure-play online brands grew by 74%, and lesser-known brands grew by 69%-- surpassing the 53% gains made by top brands. To be sure, top brands still dominate in highly standardized categories like consumer electronics, where they control a 70% share of online sales. However, smaller brands claim a higher share in more personalized categories. In apparel, for example, smaller brands have achieved about 50% share compared with bigger brands' share of less than 10%.

? While the Internet helps smaller brands by offering them ease of entry, it also provides a huge boost to top brands by giving them greater access to lower-tier cities. Lower-tier cities are the new major battlefield, thanks to rising household incomes and a growing number of consumers who are discovering online shopping and the value of top brands. E-commerce allows these bigger brands to compensate for the lack of physical distribution networks in these areas, delivering higher penetration and strong sales. In most categories, top brands performed as well as smaller brands in lower-tier cities; they even surpassed smaller brands in the consumer electronics and food categories.

? Online-to-offline commerce (O2O) is becoming a reality, organically and through M&A and partnerships. Over the past year, horizontal platforms such as Amazon and Alibaba--which sell multiple product categories--have responded to the new emphasis on brands by building closer alliances with vertical and brand-owned platforms, as well as with offline retailers, which focus on a limited number of categories and typically are closer to their customers. For example, Alibaba invested in Suning, invested in Yonghui, and Tencent and JD jointly launched "Jing Teng plan." These moves allow horizontal platforms to acquire consumer information and create more customer touchpoints via physical stores or social platforms, helping to deliver the long-promised era of O2O retailing.

? Sales generated from overseas sites are on the rise. This trend has continued to gain momentum as Chinese consumers look to retailers outside the country for products that deliver higher assurances of health and safety. Shoppers are turning to sites in Australia and New Zealand, for instance, for baby food and to USbased sites for apparel and electronics. Such global sales are expected to grow annually by 30% in the years ahead, reaching a total value of RMB 1 trillion by 2020.

As consumers in all city tiers increase their reliance on e-commerce and their preference for quality goods, online retailers and brands are responding. They're finding it necessary to match their consumers' growing sophistication with innovative business models. It's no longer a matter of just making generic products available at a low price. Emerging leaders are breaking their old patterns of indirect communication with consumers and developing creative ways of co-creating brands with consumers, making the most of multiple touchpoints across the value chain.

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China's E-Commerce: The New Branding Game

The leaders see this as a transformation process that starts with a clear digital ambition and requires defining a digital operating model along the value chain (including R&D and supply chain, marketing and CRM, sales and channel), supported by a digital organization and infrastructure. Our analysis of Alibaba data, combined with executive interviews, enabled us to identify the common patterns that leading companies are using across the Internet value chain. We found that winners typically focus their efforts in different areas depending on their phase of development. ? Beginners build standalone online marketing and sales systems, supplemented with a small digital sales team. ? Intermediates integrate online and offline channels for more targeted, proactive and efficient consumer

engagement across multiple touchpoints. They rely on a full-function digital team or an integrated team for both online and offline channels. ? Experts disrupt the established business model with an innovative, consumer-led value chain configuration, supported by project teams that are focused on multiple consumer segments. Among the biggest changes in China e-commerce is the emergence of the new model of co-creation between brands and consumers. We find that some companies aim to just keep pace with the fast-changing market, while others strive to disrupt it. Either way, the most successful companies work to change their company mindset, creating a culture of learning, risk-taking and innovation. Winners focus on finding new ways to engage with customers and integrate customer feedback into new products. Based on our research, we see that leaders follow a rigorous three-step process to design a digital transformation manual and develop the digital transformation roadmap tailored to their brands. The journey begins when they ask and answer a list of key questions involving overall strategy, industry and company digital transformation progress assessment, digital vision, available resources and mobilization approaches.

1 Throughout this report, top brands refers to multinational and national brands with national distribution and high awareness across China; regional and pure online brands refers to those with distribution or brand awareness only in a few provinces; lesser-known brands refers to those with legitimate brand logos and registered trademark, no brand awareness beyond a few original cities or no brand propositions, with limited distribution network and brand and marketing investments; no brand refers to those with no registered trademark, unidentifiable or no brand logos, also including categories with weak brand attributes (such as agriculture products, handicrafts, DIY products, customized furniture, hardware tools, books and video).

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